J.J. Goldberg

What Bibi Could Teach Obama About Regulating Banks and Saving Democracy

By J.J. Goldberg

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There was a little business story in today’s Haaretz that you probably overlooked. It’s a real eye-opener. It’s about steps being taken by Israeli Prime Minister Netanyahu to reform the regulation of the finance industry. But what it’s really about is how a determined political system can stop bankers from taking over, wrecking the economy and ruining everyone else’s lives.

The issue Bibi is looking at is the growing control by investment banking and the finance industry over the rest of the Israeli economy, and the damage that does to democracy. The similarities to our own situation here are creepy. The eagerness of the very conservative Netanyahu and company to deal with it in advance makes a striking contrast to the caution of Obama and the Democrats.

Prime Minister Benjamin Netanyahu decided last evening to establish a committee on economic concentration and ways to increase competition in the economy. Its conclusions on ways to increase competition will go to Netanyahu, Finance Minister Yuval Steinitz and the governor of the Bank of Israel, Stanley Fischer, within four months.

The new committee will discuss restricting large-scale pyramid-type holdings in public companies; strengthening corporate governance in public companies; the question of financial firms controlling non-financial firms; antitrust policy; and toughening the conditions for the purchase of state assets.

The decision comes after months of discussion. The fact that it took several months to convene the meeting and reach a decision is itself a scary comment on the influence of the financial world over the government, as this story from yesterday’s Haaretz explains in very readable detail.

The discussion in the Prime Minister’s Office should never have been necessary. The moment the prime minister and governor of the Bank of Israel decided last year that the concentration of wealth was hurting competition, productivity, financial stability and democracy, they should have appointed a team of experts to study the issue in depth and make recommendations.

Okay. So why the fear? Why the hesitation? Why summon a special debate on whether or not a committee to study economic concentration needs to be established?

The reason, the story says, is clear:

Israel has seven, or 10, or 20 people, the precise number doesn’t matter, who control a trillion shekels worth of public resources. Twenty oligarchs who hold most of the people’s money. Twenty tycoons who make hundreds of top-level appointments, who control thousands upon thousands of jobs in the private sector, who spend billions on consultants, lawyers, accountants and advertising. …

Who are these 20-odd people who pull the strings? That was spelled out in an accompanying news analysis. Among the suspects: Nochi Dankner, head of the IDB (Israel Discount Bank) Group as well as Coor insurance; Yitzhak Teshuva, head of the Delek Group (as in Delek petroleum) plus Phoenix Insurance and our own Plaza Hotel; Shari Arison, who heads Bank Hapoalim (“The Workers’ Bank,” ironically founded by the Histadrut and for years Israel’s most successful bank) and is the sister of Mickey Arison of Miami, head of Carnival Cruise Lines and No. 69 on the new Forbes 400 list of wealthiest Americans; the Ofer family, owners of Bank Mizrahi-Tefahot and the Israel Corporation; and a few others.

Why is it a problem? The story gives examples of major economic decisions that affect the well-being and future of the entire country, made by a handful of people who have a direct stake in the outcome. For instance,

People owning companies unlikely to repay debt also owned an insurance company, investment company, or bank that lent money to that same company.

In other words, a person could become their own creditor and determine the fate of their policy-holders’ money, although they have a huge personal stake in the decision.

Just as egregious, this clique of people who borrow and lend money share the same social circles. One must ask: To what degree will the investment and insurance company managers be willing to come into conflict with their bosses’ friends?

The story quotes from a 2003 speech by the then-governor of the Bank of Israel, David Klein, who compared the interlocking ownerships of banks, insurance, industry and retail to family incest.

”Isn’t the financial family endangering itself with incest? It’s not clear who the parents are and who the children are, who is whose sibling and who is married to whom,” Klein said at that time.

”Can an insurance company be its own grandmother? Can a retirement fund be its mother’s mother? Can two banks be brothers because they have the same father? Can a trust fund be the daughter of a bank, and at the same time also its sister, since both are the mothers of the same insurance company?” Klein continued.

For a crystal-clear visual explanation of how these incestuous relationships interconnect, check out this brief YouTube selection:

Permalink | | Share | Email | Print | Filed under: Stanley Fischer, financial industry regulation, Israeli banks, Bibi Netanyahu, Bank of Israel

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